India is now four years into the unique experiment in fiscal federalism that is the Goods and Services Tax (GST). The introduction of GST did increase the tax base and revenue for the government; however, the journey has not been entirely smooth.
The consistent glitches in the portal with the failure to achieve full automation, multiplicity of forms, increased compliance burden, and absence of an appellate mechanism are some of the persistent issues which continue to plague GST.
However, as GST enter its fifth year, with the expiry of the five-year constitutionally guaranteed compensation payout by the Central government to the State governments looming large, it will perhaps be the first major test of the institutional framework of GST and its well-publicized motto of “One Nation, One Tax.”
This article considers some of the critical issues which will shape the future of GST in India.
Expiry of the Five-Year Compensation Payout
GST was introduced to address the limitations of the former indirect tax regime, where multiple taxes were levied by the Center and States with various overlaps and inefficiencies. This meant that States had to give up a host of levies that they previously controlled and from which they drew revenue. Also, with GST being a destination-based tax, revenues shifted from production States to consumption States.
As part of the “grand bargain” that was struck in order to introduce the GST, the right to tax certain subjects (notably alcohol, which generates considerable tax revenue) remained with the States. Most importantly, States were entitled to annual compensation from the Center to the extent of revenue loss on account of the implementation of GST, for a period of five years post the transition.
With this period due to expire in less than a year from now, the States have already begun clamoring for an extension of the compensation payout. While GST collections have no doubt increased over time (with a record high recently in April 2021) this does not obviate the need for compensation to the States.
Given the current fiscal situation in most States, the failure to reach consensus on compensation may seriously undermine the cooperative federalism necessary for the continuity and stability of the GST. In the worst-case scenario, States could seek to deviate from the GST, which will introduce distortions in taxation and credit flow (much like the former value-added tax regime).
Struggles with Digitalization
One of the most-publicized benefits of GST was complete automation, which would minimize revenue leakage, eliminate bogus transactions and facilitate ease of doing business. However, various forms and returns which were initially intended to be brought in on the transition itself are yet to be rolled out four years into the regime, and a truncated return continues to be utilized instead.
Even among certain of the forms that have seen full implementation, pervasive technical issues have arisen—a case in point is Form TRAN-1, which was ironically one of the most litigated issues in the last four years.
Hence, apart from a fully automated system being incompatible with the low level of digital access in segments of the Indian business community, the GST portal has itself been unable to reach a stage of complete implementation even at the present date.
Issues with Advance Rulings and Anti-Profiteering Rulings
Under GST, authorities were set up in each State to issue advance rulings clarifying various issues in order to enable smooth implementation and certainty for assessees. Quite apart from the poor quality of these rulings, a serious issue has arisen with conflicting rulings emerging from different States. While the government, in recognition of this problem, enacted provisions for a national-level body to resolve such disputes, this authority is yet to be established.
Separately, the infamous anti-profiteering clause was introduced to ensure that no business fails to pass on benefits introduced by GST to its customers. However, the mechanism still sets out no methodology to guide businesses on how to pass on the benefits of GST. As a result, various critical issues have been arbitrarily determined by the tax authority in its rulings, often in a contradictory manner.
Currently, the validity of both the above mechanisms (particularly on account of the absence of a judicial member) remains pending before the High Courts. Meanwhile, these institutions continue to function, sometimes creating more issues than they resolve.
GST in its current form does not provide for a mechanism to address Center-State and State-State disputes under GST. While Article 279A(11) of the Constitution enables the GST Council to institute a mechanism to resolve inter-State disputes, no such body has been seriously contemplated as yet. Today, the law only provides that if tax has been wrongly paid to the Center there will be no interest liability (but not vice versa) and if tax has been wrongly paid to a State, it will be refunded. Hence, even where the Center and States are themselves in a dispute as to who has the right to tax, the assessee could end up bearing the burden of tax twice over, as well as interest and potentially a penalty.
In this regard, GST may follow the example of a unique mechanism which was set up to resolve such disputes (over whether the Center or State had the right to tax a sale of goods) under the earlier sales tax law. Pending the dispute, the tax already paid in one State was taken into account to ensure that assessees did not suffer a double levy on the same transaction.
With the advent of a new tax regime, it was only to be expected that there would be challenges to the validity of certain provisions by way of writ petitions. While various such challenges were raised, the larger volume of writs by far has involved issues such as detention of goods/vehicles, arrests, technical glitches on the GSTN portal, failure to disburse refunds, delayed refunds.
In this regard, the issuance of exhaustive departmental guidelines, coupled with more robust training and internal accountability mechanisms, will go a long way to ensuring that a more balanced approach is adopted by the Tax Department, thereby alleviating the load for the already over-burdened courts.
Future of GST
Uncertainty remains over the stability of GST if compensation is cut off. Be that as it may, it is high time that the various inadequacies and shortcomings are suitably addressed. The failure to do so will only serve to compound their ill-effects as India enters into the next stage of GST.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Views expressed are personal.
Kumar Visalaksh is a Partner and Divya Jeswant is Counsel at Economic Laws Practice.
The author can be reached at email@example.com.